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/^^ United Stateà-^^rv "^

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Rural

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Research Report

Number 34

Examining thie Rurai

i\/lunicipai Bond \^^xVs^

PatWckJ^Sufeisi

mi
EXAMINING THE RURAL MUNICIPAL BOND MARKET, by Patrick J.

Sullivan. Economic Development Division, Economic Research

Service, U.S. Department of Agriculture. RDRR-34.

ABSTRACT Nonmetro governments have increased their reliance on long-term

borrowing faster over the last two decades than metro governments have. However, outstanding per capita debt for nonmetro

areas is still lower. Current budget cuts make Federal assistance to local governments scarce. Therefore, the municipal bond

market may become a more important method for rural governments

to finance the construction of public facilities.

Keywords: Municipal bonds, local government finance, rural

government borrowing, tax-exempt securities

ACKNOWLEDGMENTS The author thanks Eleanor Whitehead for her assistance in

preparing the data; William Fox, Thomas Hady, James Mikesell,

Daniel Milkove, Richard Reeder, and Thomas Stinson for many

useful comments; Linda Hatcher for editorial assistance; and

Deborah Acors and, especially, Lucy Marshall for preparation

of the manuscript.

Washington, D.C. 20250 January 1983

11
SALES INFORMATION Additional copies of this report—Examining the Rural Municipal

Bond Market (RDRR-34)—^may be ordered from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Order this report by using PB83-143602, and indicate whether

you want paper copies or microfiche. Cost per paper copy is

$8.50; cost per microfiche is $4.50 (prices subject to

change).

The Economic Research Service has no copies for free

distribution.

ALSO AVAILABLE The Cost of Metro and Nonmetro Government Borrowing (RDRR-35)

Nonmetro governments paid about the same interest rates on

municipal bonds sold in 1977 as metro governments, even though

rural governments had more limited access to regional and

national bond markets. The movement toward State taxing

limitations and the tightening of Federal budgets may make the

bond market a more important source of local government construction funds. This study indicates that rural governments in

general should have as much (or as little) access to the bond

market as urban governments,

This report may be ordered from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Order by using PB83-143610, and indicate whether you want paper

copies or microfiche. Cost per paper copy is $8.50; cost per

microfiche is $4.50 (prices subject to change).

The Economic Research Service has no copies for free

distribution.

1X1
CONTENTS Page

SUMMARY V

INTRODUCTION. 1

RECENT BORROWING TRENDS 2

CHARACTERISTICS OF RURAL GOVERNMENT DEBT. 8

Type of Debt Issued 9

Purpose of Debt Issued 11

Maturity Structure of Debt Issued. 13

Quality of Debt Issued. 15

MARKETING RURAL GOVERNMENT DEBT 20

Bond Is suer s. • 21

Method of Sale. . 23

Bond Underwriters. 26

Bond Investors. . 29

POLICY IMPLICATIONS 31

State and Federal Role 32

REFERENCES 37

APPENDIX—GENERAL CHARACTER OF NONMETRO COUNTY GROUPS 39

IV
SUMMARY Nonmetro governments have increased their reliance on long-term

borrowing faster than metro governments in the past 20 years.

However, outstanding per capita debt for nonmetro areas is

still lower. Current budget cuts make Federal assistance to

local governments scarce. Therefore, the municipal bond market

may become even more important for rural governments in financing

the construction of public facilities.

The enormous growth in Federal and State intergovernmental aid

programs during the seventies made coping with the continuing

population and economic growth of small towns and rural areas

easier for local officials. However, the current movement

toward State tax limitations and the tightening of Federal

budgets may force rural governments to rely more heavily on

bond sales.

Interest rates on municipal bonds are far above the rates

local governments paid in the seventies* If the cost of much

needed construction projects is to be held down, rural governments are going to have to change their borrowing techniques.

Nonmetro governments, at least in 1977, tended to sell small

bond issues, to sell them noncompetitively, to rely on revenue

bonds (bonds backed by revenues from a specific source such as

highway tolls), and to receive either no bond rating or unfavorable bond ratings. Each of these characteristics added to the

cost of bond financing.

This reliance on noncompetitive sales possibly came from a lack

of technical expertise in marketing bonds or from a lack of

underwriter interest in small-sized bond issues. However,

State governments are helping to alleviate this problem. The

following programs already have been adopted in one or more

States in an attempt to lower the cost of borrowing for small

towns and rural areas :

o Technical assistance programs can improve local government

understanding and evaluation of the alternatives in

issuing bonds. Programs which help develop general

managerial skills among local officials can reduce the

cost of selling bonds by reducing reliance on negotiated

sales. Efforts to encourage the use of circuit riding

managers who serve a number of local jurisdictions in an

area could be expanded to include bond marketing experts

who would help local officials design a bond issue and

guide it through the marketing process. These efforts

could also raise bond ratings because the competence of

local officials, as perceived by the rating analyst,

plays a role in determining what the credit quality

judgment will be. The cost of small, unrated bonds also

could be affected by improving the managerial procedures

of rural officials.
o Offering several small bonds for sale at one convenient

location can increase underwriter interest in small

bonds. Such a plan would reduce the underwriters' costs

of submitting bids on bonds and heighten underwriter

competition for rural bonds, making competitive sales a

viable marketing method for more rural borrowers,

o State supervision programs which increase the perceived

investment quality of rural bonds by major investors can

broaden the market for these bonds. Investors may come

to accept the judgment of State officials on the local

government's ability to pay back their debts effectively

on municipal bonds. However, such programs reduce local

government autonomy and, therefore, may meet considerable

resistance from local officials. To some extent, the

autonomy factor can be avoided by making local participation in the program optional.

VI
Examining the Rural Municipal

Bond Market

Patrick J. Sullivan'

INTRODUCTION The New York City fiscal crisis in 1975 stimulated attention

on the condition and operation of the municipal bond market.

However, very little attention has been focused on the market

for rural municipal bonds. \J This study describes recent

trends in rural government reliance on municipal bond financing

of public and quasipublic construction projects. The unique

character of rural municipal bonds is also highlighted.

Local governments often undertake large construction projects

to maintain service quality and to meet the demand for more

public services that accompanies population and economic

growth. Small towns and rural areas often need new schools,

expanded water and sewer systems, and improved highways as

populations grow. The enormous growth in Federal and State

intergovernmental aid programs during the seventies made coping

with population changes easier for local officials (20). Ij

Many grant and loan programs were aimed specifically at aiding

local government capital projects. However, the current

movement toward State tax limitations and the tightening of

Federal budgets may force rural governments to increase reliance

on bond financing.

Most analyses of the municipal bond market examine aspects of

the entire market or put major emphasis on State and large city

borrowing. Only rarely is the possibility raised that the

national bond market may not describe the market facing

rural issuers. Policies often are discussed without reference

to the market faced by rural governments, or the discussion is

based upon presumed differences and similarities between large

^Economist, Economic Development Division, Economic Research

Service, U.S. Department of Agriculture.

\J The terms "municipal bonds" and "tax-exempt bonds" will be

used interchangeably throughout this report. All securities

issued or guaranteed by States, their political subdivisions,

agencies, or instrumentalities are referred to as municipal

bonds if their interest is exempt from Federal income taxation.

%J Underscored numbers in parentheses refer to items in the

References section.
borrowers and small borrowers (14). This report reveals that

nonmetro areas have been remarkably successful in marketing

long-term municipal bonds. Although their debt burdens remain

low, local governments in nonmetro areas have increased outstanding debt at a faster rate over the last two decades than have

governments in metro areas. 3_/

Despite the success of many nonmetro governments in issuing

bonds, differences remain between metro and nonmetro bonds

which make the rural bond market unique in many respects. Many

of the characteristics of nonmetro bonds and their method of

sale add to the cost of bond financing.

Data on local government debt at the close of the 1977 fiscal

year and data on bond sales reported in 1977 are the basis for

the description and analysis to follow. Recent borrowing

trends are based on local government financial information

periodically collected by the Census Bureau. The latest year

for which these data are available for all local governments is

1977. The Census Bureau does not request information on

individual bond sales in their decennial census of governments.

However, this information is regularly collected from reports

in the financial press (primarily The Bond Buyer) and from bond

dealers by the Public Securities Association (PSA). The PSA

data on local government bond issues sold during 1977 are used

to evaluate the characteristics and marketing of rural government bonds.

RECENT BORROWING The outstanding debt of State and local governments has grown

TRENDS substantially over the past two decades. Outstanding debt

increased slightly over 100 percent during the sixties. During

the seventies, it increased over 125 percent, despite disruptions

caused by the fiscal decline of several large cities and an

erratic national economy. However, its growth has not kept

pace with the growth of State and local government spending

over these two decades. At the outset of the eighties, the

long-term debt of State and local governments amounted to $281

billion, with further growth anticipated as tax-exempt financing

is used for a wider range of purposes.

These national trends have also been evident in rural areas.

The growth in outstanding debt for governments in metro and

ZJ A bond is a written promise to pay a specified sum of

money on a specific data in the future, together with periodic

interest at a specified rate. A typical bond has a face value

of $5,000; a bond issue is a group of bonds sold at one time as

a package. As used in this report, debt is the dollar amount

of bonds sold or outstanding.
nonmetro areas over the 1962-77 period is shown in table 1.

Per capita figures are reported in order to standardize the

figures and correct for population shifts. Per capita State

and local government debt increased nearly 165 percent over

these 15 years. Much of this growth was due to higher levels

of debt financing by State governments and their agencies;

however, local governments added to their debt burdens throughout

the period as well« Local government per capita debt increased

by roughly 135 percent in metro areas and nearly 150 percent in

nonmetro areas. Growth was particularly notable in the less

urbanized and totally rural areas. (For a description of these

county groupings, see the appendix.) Despite this growth, the

level of debt in nonmetro areas remained modest by metro

standards. Total outstanding per capita debt was 73 percent

higher in 1977 for metro governments than for nonmetro governments. Furthermore, this ratio did not change appreciably over

the 1972-77 period since per capita debt increased by about 35

percent in both metro and nonmetro areas. Local debt actually

declined as a percentage of income for all government categories

over this 15-year period. Total debt as a percentage of income

for nonmetro areas declined from 15.2 to 8.9 percent.

Changes in the nature of the debt are as important an aspect of

local government borrowing trends as changes in the amount of

debt. Local government debt is not homogeneous. The U.S.

Bureau of the Census classifies local government debt according

to the length of its term to maturity, the funds pledged for

debt repayment, and the purpose for which the debt was incurred.

An examination of these characteristics suggests that the

growth of the municipal bond market in nonmetro areas has been

accompanied by changes in the character of nonmetro municipal

bonds.

Growth in per capita debt is reported by length of maturity and

type of security for the 1962-77 period in table 1. Short-term

debt refers to all interest-bearing bonds payable within 1 year

from the date they were issued. Bank loans and various types

of revenue anticipation bonds (or notes) are included in this

category. Long-term debt refers to interest-bearing bonds

falling due more than 1 year after issuance. The long-term

component of the municipal bond market will be emphasized in

this report because most debt-financed construction ultimately

depends on the sale of long-term bonds.

Table 1 divides long-term debt into two components based on the

type of bond—general obligation and revenue. General obligation

bonds are unconditionally backed by the issuing government's

general revenues or, if these prove insufficient, by the

full taxing power of the jurisdiction. Revenue bonds are not

backed legally by the issuing government's general revenues but
Table 1—Growth in outstanding per capita debt by type of debt, level of government, and

metropolitan status

Long-term debt

; Total debt Short-term debt

Category Total [ General obligation Revenue

: 1977 ;

Change :

1962-77 1977 :

Change ,

1962-77 1977 : Change

: 1962-77 1977 :

Change •

1962-77 :

1977 : Change

: 1962-77

¡Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent

State and local

governments 1,200.24 164.8 1,140.88 163.8 630.54 134.0 510.34 213.2 59.36 185.0

Local governments 782.45 138.7 737.03 138.3 432.18 104.6 304.85 210.9 45.42 145.0

Metropolitan 885.05 134.1 828.99 133.7 505.38 105.7 323.61 196.7 56.06 140.3

Nonmetropolitan y • 511.77 149.5 494.42 149.3 239.06 88.0 255.36 258.9 17.35 153.7

urbanized 2/ 519.49 109.4 494.29 105.6 245.00 72.3 249.29 154.0 25.20 227.4

Less urbanized _3/: 510.26 169.5 496.83 171.9 233.09 93.1 263.74 325.2 13.43 104.2

Rural kj 493.82 236.2 485.50 243.4 244.06 122.0 241.44 667.0 8.32 51.6

1_/ Metropolitan status is determined according to whether or not the issuing government was located in a

Standard Metropolitan Statistical Areas (SMSA) as defined in 1974.

2J Issuers located in nonmetro counties which had 20,000 or more people residing in urban places in 1970.

V Issuers located in nonmetro counties which had between 2,500 and 19,999 people residing in urban

places in 1970.

kj Issuers located in nonmetro counties which had no urban places in 1970.

Sources: Calculated from data reported in the U.S. Bureau of the Census, 1962 and 1977 Census' of Governments.
depend on a specific revenue source such as highway tolls or

utility charges for the funds needed to repay principal and

interest. _4/

The distinction between general obligation bonds and revenue

bonds is important because these two broad classes are treated

differently in many State and Federal government regulations

and by rating agencies and investors. For example, although

State regulations often require general obligation bond sales

to have prior voter approval, to be conducted at a competitive

public auction, and to satisfy existing debt limits, the sale

of a revenue bond may not need to meet any of these requirements

(11). Furthermore, because revenue bonds are backed by a

specific revenue source, they are analyzed differently by the

national credit rating agencies and are treated differently

than general obligation bonds by investors.

Most of the net change in outstanding long-term debt for both

metro and nonmetro areas was due to the growth of revenue

bonds, despite the fact that they are costlier to market than

general obligation bonds. Revenue bonds made up only 36

percent of the total outstanding long-term debt in nonmetro

areas in 1962. By 1972, this ratio increased to 45 percent

and, by 1977, revenue bonds accounted for 52 percent of

total outstanding long-term debt in nonmetro areas. The use of

revenue bonds has been on the rise in metro areas as well,

although they have relied much more on general obligation

bonds. The relative share of revenue bonds increased between

1972 and 1977 from 32 percent to 39 percent of total outstanding

long-term debt in metro areas, bj

Local governments may prefer issuing revenue bonds to issuing

general obligation bonds for several reasons. Revenue bonds

are usually subject to fewer State regulations and are less

likely to reduce a government's bonding capacity. The growing

importance of special districts could also influence the choice

of debt instruments. These governmental entities often have

restricted taxing powers, making general obligation bonds

kj As used in this report, the terms general obligation bonds

and full faith and credit bonds are synonomous as are the terms

revenue bonds and nonguaranteed bonds. The Census counts debt

payable in the first instance from particular earmarked taxes

or nontax revenues, but ultimately backed by the government's

general fund, as general obligations (22)>

bj Reliance on revenue bonds has continued to grow in recent

years, spurred in part by the tax limitation movement. For a

discussion of recent trends in the use of revenue bond financing,

see (5).
impractical. Furthermore, use of revenue bonds reduces the

government's risk of revenue loss if the funds the facility is

expected to generate do not materialize. The nature of the

facility to be built often influences the type of bond used as

well. The type of outstanding debt can be expected to change

as the purposes for which local governments issue bonds change.

For example, governments will issue general obligation bonds

backed by general revenues if funds are needed for construction

of nonrevenue-producing facilities, such as public secondary

schools. On the other hand, if funds are needed to construct

revenue-producing facilities, such as civic centers or industrial parks, governments can, and often will, issue bonds

backed by facility revenues. Table 2 presents information on

the changing purposes for which local governments in metro and

nonraetro areas issued debt.

The Census Bureau collects debt information in varying degrees

of detail from different types and sizes of governments. When

this information is aggregated to county groups, reasonably

accurate data are available only for schools and utilities.

Therefore, the numerous other purposes for which local governments issue bonds have been grouped together under the title

general purpose in table 2. The table indicates the relative

importance of each major purpose for which debt was outstanding

in 1962 and 1977.

Debt incurred for building schools made up a much smaller

proportion of the local government debt for both metro and

nonmetro areas in 1977 than it did in 1962. While school

construction slowed, local governments were using bonds to

finance a wider range of public and private facility construction. The volume of industrial development bonds increased

throughout the sixties until restrictions were placed upon

their use by the Federal Government, _6/ Bonds issued to help

the private sector purchase pollution control equipment

comprised an ever growing proportion of the municipal bond

market during the seventies. Local governments have begun more

recently issuing bonds to support the home mortgage market

within their jurisdictions.

As a result of these compositional changes, the relative amount

of general obligation bonds has declined while the relative

number of bonds that could be tied to specific nontax revenue

sources has increased. School districts have relied almost

exclusively on general obligation bonds for long-term financing.

On the other hand, utility bonds and many types of genéralos/ Since 1978, the volume of industrial revenue bonds has

once again increased rapidly (21).
Table 2—Outstanding long-term debt by level of government and metropolitan status

:Total outstanding

: long-term debt

Utilities

: Educat ion

Gener

purpo

al

Category

Tot al : Wat er :

Electric and :

gas : Transit

se

• 1962 : 1977 • 1962 : 1977 1962 : 1977 1962 : 1977 : 1962 : 1977 . 1962 : 1977 1962 : 1977

: Million

: 77,543

dollars

246,816

T»^,

State and local

governments 15.8 16.3 8.7 6.8 4.5 7.4 2.6 2.1 28.6 23.2 55.6 60.5

Local governments : 55,454 159,448 22.1 23.1 12.1 10.5 6.3 9.5 3.7 3.1 32.7 23.8 45.2 53.1

Metropolitan ; 45,123 130,047 20.9 22.4 12.2 10.2 4.2 8.4 4.5 3.8 31.1 22.7 48.0 54.9

Nonmetropolitan 10,331 29,401 27.7 26.1 12.1 11.8 15.6 14.3 — — 39.3 28.8 33.0 45.1

Urbanized : 4,560 11,374 29.3 21.7 14.3 12.3 15.0 9.4 — — 37.2 28.7 33.5 49.6

Less urbanized 4,801 14,415 28.0 31.9 10.6 12.2 17.4 19.7 0 — 40.2 29.0 31.8 39.1

Rural 970 3,611 18.9 17.0 9.6 8.6 9.3 8.4 0 0 44.7 27.4 36.4 55.6

— = A quantity more than 0 but less than 0.05.

Sources: Calculated from data reported in the U.S. Bureau of the Census, 1962 and 1977 Census* of Governments,
purpose bonds are issued to finance construction of facilities

which generate their own revenue. This makes the sale of

revenue bonds possible. Thus, to some extent, the declining

importance of using bonds to finance school construction and

the increasing importance of local government funding of

private and quasipublic facilities helps explain the growing

popularity of revenue bonds in both metro and nonmetro areas.

CHARACTERISTICS OF

RURAL GOVERNMENT

DEBT

Unlike the debt transactions of large corporations, the sale

of municipal bonds is not closely regulated by the Federal and

State governments. While Federal and State regulations apply

to local government bonds, enforcement of these regulations

is often left to the participants in the marketing process. As

a result, the amount of detailed information collected on local

government bond sales varies radically from State to State and

even from bond to bond. However, the Public Securities

Association (PSA) has developed a national data base that

records similar information on a wide range of municipal bond

sales. The PSA data on bond issues sold during 1977 (to match

Census of Governments data) were assigned a geographic location

code and used to evaluate the characteristics and marketing of

rural government bonds.

The municipal bond market was fairly stable during 1977, having

recovered from the turmoil surrounding New York City's financial

difficulties in 1975, The sample period, therefore, should

reflect fairly typical municipal bond market conditions. The

data set includes 5,331 long-term bond issues, amounting to $46

billion, sold during 1977 by various State and local governments.

Of these, 2,951 metro bond issues and 1,862 nonmetro bond

issues were identified. The remaining bond issues were either

State government bonds or bonds of local governments which

could not be classified as belonging unambiguously to either

the metro or the nonmetro group.

The PSA data set does not report information on all bonds sold

during any given time period, nor do reported sales constitute

a representative sample of all bond sales. The PSA is more

likely to report information on larger bond issues, on the

bond sales of frequent borrowers, and on those bonds sold

through major bond underwriting firms. Because many rural bond

issues fall outside this set, many of them likely go unreported

and are not included in our data set. Nonetheless, information

should be recorded on most of the dollar volume of debt issued

by both metro and nonmetro governments. The data, therefore,

should give a reasonably accurate picture of the rural bond

market, although the results should not be interpreted as

representing the characteristics of the average bond issue

for either metro or nonmetro areas.
Type of Debt Issued Table 3 shows the distribution of long-term municipal bonds

sold by State and local governments by type of security. The

average size of each type of bond issue is also reported.

Although roughly two'-thirds of all bond issues sold by each

local government category in 1977 were general obligation

bonds, the small average size of the general obligation bond

issues meant that the dollar volume of revenue bonds was

actually greater for all categories of local government.

Nearly 62 percent of the dollar volume of State and local

government bonds sold in 1977 was in the form of revenue bonds.

Governments in nonmetro areas continued to rely on revenue

bonds for a greater percentage of their debt financing than did

metro governments (see table 1).

In most respects, 1977 is a representative sample period for

the municipal bond market as a whole; however, it is atypical

in a couple of respects. First, as will be discussed shortly,

the volume of refinancing was unusually high in 1977. Second,

during the year, the city of Valdez, Alaska, issued $1.2

billion worth of industrial revenue bonds to finance the

construction of the Alaskan oil pipeline terminals at the Port

of Valdez. The five bond issues involved amounted to 18

percent of the year's nonmetro bond sales and 66 percent of the

bond sales of totally rural governments. All subsequent tables

reporting dollar volume data exclude the Valdez bonds from the

nonmetro and totally rural figures in order to give a more

representative picture of the nonmetro bond market.

When the Valdez bonds are excluded, the relative importance of

revenue bonds in nonmetro and totally rural areas declines

dramatically. Nonetheless, nonmetro areas as a whole continued

to rely on revenue bonds to a much greater extent than did

their metro counterparts. Revenue bonds represented roughly 67

percent of the corrected nonmetro total, although they accounted

for 52 percent of the dollar volume of long-term debt issued by

metro governments.

Table 3 shows that governments in nonmetro areas tended to sell

smaller sized bond issues than did metro governments. The gap

between the size of metro and nonmetro bond issues likely is,

if anything, too small because of the underreporting of

smaller issues. This difference is especially true of revenue

bonds because small-sized revenue bond issues are less likely

to be included in our data set. Nonmetro bond issues tend to be

about half the size of metro bond issues. The relative size of

nonmetro bond issues is even smaller for general obligation

bonds. This small average size may affect the marketing of

nonmetro bond issues as we will see later in this report.
Table 3—The number, average size, and type of long-term bonds sold by level of government

and metropolitan status, 1977

: All long--term bonds : General obligation bonds 1/ Revenue bonds

Category

Issues ;

Average

size " Issues *

Average

size

: Percentage

: of total Issues : Average :

: size

Percentage

of total

Million Million Million

: Number dollars Number dollars Percent Number dollars Percent

State and local

governments : 5,331 8.66 3,344 5.30 38.4 1,987 14.32 61.6

Local governments U . 4,819 5.88 3,232 3.73 42.6 1,587 10.24 57.4

Metropolitan 2,951 7.29 1,989 5.16 47.7 962 11.70 52.3

Nonmetropolitan 1,862 3.65 1,243 1.46 26.7 619 8.04 73.3

Nonmetropolitan 11 ' 1,857 2.99 1,243 1.46 32.7 614 6.08 67-3

Urbanized 610 3.98 388 2.00 32.0 222 7.44 68.0

Less urbanizedI : 979 2.55 654 1.17 30.8 325 5.31 69.2

Rural 273 6.85 201 1.34 14.4 72 22.22 85.6

Rural y 268 2.34 201 1.34 43.0 67 5.33 57.0

1/ Includes limited tax bonds not classified as full faith and credit obligations.

2/ Includes governments that could not be classified as metropolitan or nonmetropolitan.

3/ Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparison purposes.

Sources: Calculated from unpublished data from the Public Securities Association long-term municipal bond file and from

the PSA 1977 Annual Report on the Municipal Market.
Purpose of Debt Table 4 presents a distribution of the dollar volume of longIssued term bonds sold in 1977 by the major purpose for which they

were issued. The information available on individual bond

issues is sufficiently detailed to allow a more refined categorization of purposes than was possible in table 2 using

Census data. Nonetheless, a significant portion of State and

metro government bonds were too complex to be grouped into any

one category and had to be reported as other. On the other

hand, nonmetro bonds could be distributed more easily among the

use categories because of their relative simplicity.

Besides the other category, refinancing debt was the single

most important use for bonds sold by each government category

except for the less urbanized and totally rural areas. The

relative importance of the various refunding schemes that were

becoming more popular during the seventies is exaggerated

considerably by the 1977 figures. As mentioned earlier, 1977

represents the first full year of interest rate stability in

the wake of the large fluctuations accompanying the fiscal

problems of several large cities in the midseventies. Many

governments began to refinance their debt as bond yields fell

from the relatively high rates of 1975. In 1975, only 3

percent of the dollar volume of State and local government bond

sales was used to refinance existing debt. As interest rates

began to decline, this proportion increased to nearly 9 percent

in 1976 and, by 1977, had mushroomed to nearly 23 percent of

the total dollar volume of State and local bonds. Since 1977,

refunding has accounted for less than 10 percent of the total

volume of bonds.

Even though 1977 was an unusual year for refinancing, the use

of proceeds data is still informative. With the exception of

the industrial development category, the relative importance of

the remaining use categories should represent recent bond

market composition for nonmetro areas. Furthermore, the more

rural areas tended to refinance less than did their more urban

counterparts. This disparity may suggest that the bond market

facing governments in the more rural areas is less diverse than

the market facing governments in or near urban areas.

Nonmetro areas tended to issue bonds mainly for pollution

control, education, electric and gas utilities, and health

facilities, and for refinancing existing debt. For the most

part, the large amount of metro debt falling into the other

category makes straightforward comparisions of the metro and

nonmetro figures risky. However, some significance can be

attached to the relative importance of pollution control and

industrial development bond sales among the government

categories. These bonds almost invariably rely on lease

pajnnents as security and are, therefore, less likely to be

11
Table 4—Purpose of long-term debt issued by level of government and metropolitan status, 1977

Total Major purpose for which bonds wereÍ issued

Category long-term

*debt issued Refinancing [ Education Electric :

: and gas :

Health \ Water \

Pollution

control

: Transiportation

: Industrial

: development ;Other

: Million

: dollars

State and local

"^ Percent"

governments 46,707 22.5 10.9 9.3 8.8 7.1 6.4 6.3 4.6 24.1

Local governments 1/- 28,321 25.5 11.3 8.0 8.4 9.8 7.8 4.6 6.8 17.8

Metropolitan 21,513 27.1 10.8 7.3 8.6 11.2 5.5 5.8 1.8 21.9

Nonmetropolitan 2/: 5,550 24.9 15.7 12.6 9.4 6.3 18.7 1.0 5.3 6.1

Urbanized : 2,430 33.2 12.8 10.5 11.4 7.9 11.7 1.1 4.1 7.3

Less urbanized : 2,493 17.6 16.0 16.6 9.1 5.3 22.5 1.1 6.6 5.2

Rural ll : 627 21.2 25.5 5.0 3.3 3.8 30.8 1.0 4.5 4.9

\J Includes governments that could not be classified as metropolitan or nonmetropolitan.

Ij Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparison purposes.

Sources: Calculated from unpublished data from the Public Securities Association long-term municipal bond file and from the

PSA 1977 Annual Report on the Municipal Market.
grouped with other bonds into one multipurpose bond issue. To

the extent that the bond issues are reported at all, the

proceeds should be correctly categorized. Ij These two

business-related uses of public funds amounted to 24 percent of

the dollar volume for nonmetro areas, compared with less than 8

percent of the total for metro areas. They are particularly

important in the less urban and totally rural areas. These are

areas which experienced considerable manufacturing employment

growth in the seventies.

Table 4 helps explain why local governments in nonmetro areas

continued to issue so many revenue bonds in 1977. The uses for

which revenue bonds are a logical means of long-term financing—

electric, gas, and water utilities, industrial development,

and pollution control facilities—accounted for 43 percent of

the debt issued by nonmetro governments during the year. In

addition, a large part of the refunding bonds sold during 1977

were revenue bonds. In this context, the fact that over 67

percent of the dollar volume of debt sold by nonmetro governments

was in the form of revenue bonds (see table 3) does not seem so

extraordinary.

Maturity Structure Governments, especially small governments with limited financial

of Debt Issued resources, need to be able to stretch debt repayment over a

long period. The ability to issue bonds with long maturities

allows government officials to distribute project expenses

evenly over the useful life of projects. Thus, a water system

expected to have a useful life of 30 years can be paid for over

the 30-year period. Few small communities could afford to

undertake such projects if water rates or tax rates had to be

set high enough to pay for the system within 5 years of its

construction.

Most bond issues sold by local governments are comprised of

bonds with various maturity dates. For example, a $l-million

bond issue would generally include blocks of bonds maturing

periodically over a 10- to 20-year period. Different types of

investors tend to purchase bonds with different maturities.

Most commercial banks, for example, prefer bonds with short to

medium terms—under 10 years. Very large banks and insurance

companies tend to purchase most of the longer term bonds—over

IJ The number and dollar volume of pollution control and

industrial revenue bonds may be seriously underestimated in

national bond market reports based on the financial press.

Evidence suggests that the financial press may report as little

as one-third of the industrial revenue bond sales and probably

reports only two-thirds of the dollar volume of industrial

revenue bonds sold (21, 23).

13
20 years. Therefore, a small rural government might have

little trouble selling bond issues comprised of short maturity

bonds but have a great deal of trouble selling bond issues with

longer term maturities.

Detailed information on the maturity structure of the bond

issues in our sample is not available. However, for roughly 66

percent of the bond issues, a measure of the average number of

years to maturity is known (10). Based on this subset of bond

issues, Figure 1 portrays the average maturity of general

obligation and revenue bonds sold by local governments in

1977.

For all categories of local government, the average maturity of

general obligation bonds is much shorter than that of revenue

bonds. Furthermore, the more rural nonmetro areas apparently

issue a slightly higher proportion of shorter termed general

obligation bonds. However, the difference is not large and may

Figure 1

Average Maturity of Bonds Issued by Type and Metropolitan Status, 1977

Years

30

25

20

15

10

All bonds

HI General obligation bonds

Revenue bonds

Local

governments

Metro Nonmetro Urban Less urban Rural

Based upon 3,166 local government bond issues for which average maturity information is available. The dollar

volume of these bonds amounted to 66 percent of the total dollar volume Issued by local governments in 1977.

The maturities reported represent an average of all the bond issues in each category weighted by issue size.

Source: Calculated from unpublished data from the Public Securities Association long-term municipal bond file.

14
be due to a bias in the subsample. 8^/ Countering this ^s the

tendency of the more rural areas to issue longer term revenue

bonds. Here too, caution must be used in interpreting this

trend because average maturity information is available for

only 30 percent of the dollar volume of nonmetro revenue

bonds.

Nonmetro governments apparently can market bond issues with

maturity structures comparable with those sold by metro governments. Little difference exists in the maturity structure of

general obligation bonds. Although less is known about revenue

bonds, at least some nonmetro governments, even those in

totally rural areas, have issued bonds with very long maturities,

This evidence suggests that the market facing nonmetro borrowers

is flexible enough to absorb the longer termed bonds needed

for many rural development efforts.

Quality of Debt Few governments have defaulted on bonds since the thirties,

Issued making it difficult to measure the risk of default. Therefore,

this section deals with credit quality as perceived by the two

major agencies currently rating municipal bonds—Moody's

Investors Service, Inc., and Standard and Poor's Corp.—rather

than actual credit quality.

Many underwriters and investors perform their own credit

analyses before purchasing all or part of a bond issue; however,

the results of these analyses are seldom made public. Only

Moody's and Standard and Poor's (S&P) rate a large number of

bonds and publish their credit quality judgments. Furthermore,

studies have demonstrated that the investing public uses the

published ratings of these two agencies to categorize municipal

bonds and that the ratings affect the interest rate local

governments have to pay on their bonds (13). The agencies'

decisions on the creditworthiness of a bond are, thus, a major

component entering into the market's judgment of a bond's

credit quality.

Moody's and S&P use similiar rating schemes that range from

prime grade investment (which Moody's denotes by an "Aaa"

rating and S&P denotes by an "AAA" rating) to an investment in

default (denoted by a "C" on Moody's scale and by a "D"

on S&P's scale). The decision on whether to have a bond rated

by either or both of these agencies usually is made by the

8_/ Figure 1 represents only 46 percent of the general obligation bonds of totally rural issuers, although the average

maturity subsample represents roughly 70 percent of the dollar

volume of general obligation bonds of most of the government

categories.

15
issuing government. Because both agencies charge a fee for

performing their credit analysis, few investors or underwriters

request ratings, and often governments themselves decide

against having a bond issue rated. ^/ Moody's rated 66 percent

of the metro bond issues and 52 percent of the nonmetro

bond issues. S&P rated only 17 percent of the metro bond

issues and 8 percent of the nonmetro bond issues. Therefore,

we have used Moody's rating unless a bond issue was rated only

by S&P.

Table 5 presents information on the proportion of bond issues

and dollar volume of bonds receiving a published rating from

either rating agency. Roughly 43 percent of the bond issues

sold by nonmetro governments were unrated compared with 30

percent of the metro bond issues. Furthermore, the percentage

of unrated bond issues increases as areas become less urbanized.

These figures are undoutedly low for nonmetro bond issues in

general because most of the bond issues not included in our

sample are likely to be unrated. As a result, the tendency for

the more rural areas to have fewer rated bond issues is probably

understated.

Percentages based on the dollar volume of bonds are less

susceptible to bias due to unreported bond issues because these

issues tend to be small. The percentage of dollar volume sold

without a rating is much lower " the percentage of unrated

bond issues (table 5). Officials in each government category

apparently find it worthwhile to purchase ratings on their

larger bond issues. Nonetheless, metro areas still had a

larger percentage of rated debt than did nonmetro areas, and

the more urbanized areas had a larger percentage of rated debt

than did the more rural areas in nonmetro America,

Table 5 also presents information on the distribution of

ratings. Nearly 87 percent of the dollar volume of local

government debt sold during 1977 was rated by either Moody's or

S&P. The published ratings ranged from "Ba," indicating

marginally speculative investments (received by less than 1

percent of the bond issues), to "Aaa," indicating prime-grade

investments (received by about 5 percent of the bond issues).

This range encompasses five major rating classes with most bond

issues receiving one of the medium-grade ratings—either "A" or

"Baa." Table 5 presents a distribution of bond issues and

9^/ The rating agencies refuse to evaluate certain types of

debt and may withhold publishing a rating on any bond for which

insufficient information is available. The fees are based on

the complexity of the bond issue being rated and on the frequency

of rating requests from the borrower (15).

16
Table 5—Proportion and volume of bonds sold with a published credit rating by

type of debt and metropolitan status, 1977 1/

Bond issues Dollar volume

Category

Unrated

: Rated

Unrated

: Rated

A or lower * Aa or higher' A or lower \ Aa or higher

Percent

All long-term bonds:

Local governments 2/ 33.9 51.0 15.1 13.2 57.2 29.6

Metropolitan 30.0 52.3 19.7 12.1 55.6 32.3

Nonmetropolitan 3/ 43.3 49.0 7.7 20.2 64.4 15.4

Urbanized 30.0 55.3 14.7 12.3 70.5 17.2

Less urbanized 45.4 49.6 5.0 26.5 58.5 15.0

Rural 2/ 66.0 32.5 1.5 25.2 64.4 10.4

General obligation bonds:4/ :

Local governments Ij 31.6 53.5 14.9 8.8 57.0 34.2

Metropolitan 25.8 54.1 20.1 6.6 55.3 38.1

Nonmetropolitan 41.0 52.5 6.5 21.3 66.5 12.2

Urbanized 26.3 57.7 16.0 12.4 65.9 21.7

Less urbanized 42.5 54.6 2.9 25.2 68.0 6.8

Rural 64.7 35.3 0 35.9 64.1 0

Revenue bonds :

Local governments 2/ 38.5 45.8 15.7 16.4 57.4 26.2

Metropolitan 32.5 48.5 19.0 17.0 55.9 27.1

Nonmetropolitan 3/ : 47.9 42.0 10.1 19.6 63.4 17.0

Urbanized ; 36.5 50.9 12.6 12.3 72.7 15.0

Less urbanized ' : 51.1 39.7 9.2 27.1 .54.2 18.7

Rural ¿/ : 70.1 23.9 6.0 17.0 64.6 18.3

1/ Only credit ratings assigned by Moody's Investors Service, Inc., and/or Standard and Poor's Corp.,

are considered,

2/ Includes governments that could not be classified as metropolitan or nonmetropolitan.

3/ Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparison purposes4/ Includes limited tax bonds not classified as full faith and credit obligations.

Source: Calculated from unpublished data from the Public Securities Association long-term

municipal bond file.
dollar volume of bonds receiving very favorable ratings and

medium to low ratings.

The basis for the rating is different for general obligation

bonds and revenue bonds, although the rating categories have

the same meaning for both. The credit quality of a general

obligation bond depends on the relationship between debt

outstanding—present and expected—and the rater's estimate of

the amount of debt which the borrower can successfully repay

under adverse economic conditions. The rating analyst is

concerned with the government's overall revenue structure, the

composition of the local economy, the managerial skills of

local government officials, and a number of other factors

affecting the government's revenue stability. The credit

quality of a revenue bond, while taking these general indicators

into account, is determined much more by the rater's judgment

of the performance of the pledged source of revenue over the

life of the bond (2_, 15). As a result, a government with a

low-quality rating on its general obligation debt can have

highly rated revenue bonds and vice versa. For this reason,

table 5 distinguishes general obligation bonds from revenue

bonds.

Nonmetro governments tended to receive a lower proportion of

favorable ratings in each category, particularly for general

obligation bonds. Thirty-eight percent of the dollar volume of

general obligation bonds issued by governments in metro areas

was rated "Aa" or better; the corresponding figure for nonmetro

areas was only 12 percent. The disparity was even larger if

only rated bonds are considered. Figure 2 presents the distribution of rated bonds among three rating classes: favorable,

medium, and low. Forty-one percent of the rated general

obligation bonds of metro governments were rated favorably

compared with only 16 percent for nonmetro governments. Within

nonmetro areas, the proportion of highly rated general obligation

bonds was much lower for governments in the less urbanized and

totally rural areas. These figures might indicate that the

rating agencies feel that the general obligation bonds of most

rural governments do not merit high grades for credit quality.

On the other hand, the low ratings received on nonmetro bonds

simply may reflect metro/nonmetro differences in purchasing

ratings. A lower average rating for nonmetro bonds would be

expected if rural governments only purchase ratings for hard-tomarket bonds while metro governments regularly purchase ratings

on most bonds. In the absence of more information, the explanation more relevant in 1977 cannot be determined.

The distribution of ratings on revenue bonds demonstrates a

different pattern. Nonmetro bonds continued to receive a

smaller proportion of favorable ratings; however, the

18
disparity was much smaller. In addition, the proportion of

highly rated bonds in the less urbanized and totally rural

areas was not significantly different from the proportion in

urbanized nonmetro areas. A comparison of the rating distributions for general obligation bonds and revenue bonds which were

rated highlights the differences between these two categories.

Only 16 percent of the dollar volume of rated general obligation

bonds in nonmetro areas was in the "Aa" and above category

compared with 21 percent of the dollar volume of rated revenue

bonds in the same category. The difference was even more

pronounced for the less urbanized and totally rural nonmetro

areas. The opposite relationship was evident for metro areas:

a larger proportion of general obligation bonds was rated "Aa"

or above than was true for revenue bonds.

The distributions of credit ratings for general obligation and

revenue bonds may help explain two characteristics of the

nonmetro bond market: the prominence of revenue bonds and the

high percentage of unrated bond issues. Revenue bonds apparently

have a better chance of receiving favorable ratings which

Figure 2

Distribution of Rated Bonds Among Major Rating Groups by Type of Bond and

IVIetropolitan Status, 1977

Percent

100

/;

All bonds

General obligation bonds

Revenue bonds

High

Medium

Low

All local

governments

Metro Nonmetro Urban Less urban Rural

^Ratings by Moody's Investors Service are used whenever possible. Otherwise ratings by Standards and Poor's

Corp., are used. "Aaa" and "Aa" are high; "A-1" and "A," mediunn; and "Baa-1," "Baa," and "Ba," low.

Source: Calculated from unpublished data from the Public Securities Association long-term municipal

bond file and Moody's Municipal and Government Manuai.

19
broaden the market of potential investors for rural bonds and

thus make them easier and cheaper to sell. The proportion of

highly rated bonds in each category indicates that metro areas

probably should favor general obligation bonds and nonmetro

areas should favor revenue bonds, 10/

The tendency for nonmetro areas to have a lower proportion of

favorably rated bonds than their metro counterparts also helps

explain why nonmetro governments choose to have a smaller

proportion of their bonds rated. Purchasing a rating is

only worthwhile if the resulting interest savings exceed the

rating agency's fee and the other incidental costs associated

with having a bond rated. Rural government officials appear to

have less incentive to apply for a credit rating because they

expect to receive low ratings on their bonds. 11/ Table 5

suggests that such an expectation may be well founded, especially

for general obligation bonds and the bonds of rural governments.

Also, the tendency for governments in less urban areas to sell

unrated bonds is partly a function of the average size of their

bond issues. Because the interest cost associated with a small

issue tends to be small, any savings attributed to a good

credit rating will also be small; in many cases, too small to

warrant purchasing a credit rating. Purchasing a credit rating

may be uneconomical in many cases because nonmetro areas,

particularly the more rural areas, tend to issue a high proportion of small issues (see table 3).

The types of debt, their uses, and credit quality are the

principal components of the rural municipal bond market.

Individual bond issues have other characteristics which could

be used to categorize the bonds of local governments in nonmetro

America. Such characteristics as, for example, the timing of a

bond sale or the use of call provisions affect the interest

rate payable on rural municipal bonds. However, they are less

likely to indicate a fundamental difference between the bonds

of metro and nonmetro governments.

MARKETING RURAL Local governments usually do not sell bonds directly to the

GOVERNMENT DEBT public. In a typical sale, the issuing government awards its

10/ However, nonmetro revenue bonds as a group may be rated

highly because of the low risk of the particular projects being

financed. Use of revenue bonds does not guarantee favorable

ratings for riskier projects.

11/ Studies have shown that, other things being equal, the

interest rate on an unrated bond will be equal to or lower than

the interest rate associated with a bond having a "Baa" rating

(19).

20
bonds to an underwriter or to a group of underwriters who

then resell the bonds to investors. Investment firms or commercial

banks usually perform this marketing function, although insurance

companies and various governmental agencies also underwrite

municipal bonds. During the marketing process, several other

agents, such as bond attorneys, fiscal consultants, rating

agencies, and paying agents, often will be directly involved.

However, the major participants are the issuing governments,

the underwriters, and the investors (10, 12).

Bond Issuers A number of governmental agencies and quasigovernmental organizations have authority to issue tax-exempt bonds. Not only can

general-purpose governments, such as State, county, city and

town governments, issue municipal bonds, but a variety of

special-purpose districts and statutory authorities also issue

a considerable amount of debt.

Table 6 presents a distribution of the dollar volume of taxexempt bonds issued in 1977 by the type of governmental unit

responsible. State governments and their statutory authorities

were responsible that year for roughly 28 percent of the total

amount of bonds sold. Local governments and local statutory

authorities were responsible for the remaining 72 percent.

When considering only bonds of local governments, the two

largest issuers were municipalities and statutory authorities.

Special districts and statutory authorities, as the terms are

used here, include government entities which are entitled to

issue tax-exempt debt but which are legally distinct from any

general-purpose government. These two categories include

such organizations as water districts, park authorities,

hospital associations, sanitation districts, industrial development boards, and housing corporations. These units are often

little more than arms of the county or city government, even

though they are legally distinct entities. 12/

Together, the bonds of special districts and statutory authorities accounted for nearly 36 percent of the dollar volume of

debt issued by local governments in 1977. The proportion of

debt issued by these special-purpose governments was roughly

equal in metro and nonmetro areas. However, special-purpose

governments were relatively unimportant in terms of debt

issuance in totally rural areas.

12/ The Public Securities Association's classification of

bonds by type of issuer is based largely on the name of the

issuing jurisdiction. No attempt is made to distinguish units

according to the degree of administrative autonomy they demonstrate as is done by the Bureau of the Census (22).

21
Table 6—Proportion of long-term bonds issued by governmental units by level of government

and metropolitan status, 1977

: States

Local governments

Category

Counties

: Municipalities,

: towns, and

: townships

School

\ districts*

Special

districts

\ Statutory

authorities

Percent

State and local

governments 28.3 9.1 25.0 6.2 5.8 25.6

Local governments 1/. na 14.5 39.4 10.1 9.7 26.3

Metropolitan na 14.0 37.4 9.7 11.1 27.8

Nonmetropolitan 2/: na 19.6 33.8 14.1 6.3 26.2

Urbanized : na 13.0 38.9 11.6 3.9 32.6

Less urbanized : na 20.4 30.3 16.0 9.2 24.1

Rural 11 : na 42.1 28.4 15.4 4.2 9.9

na = Not applicable.

\j Includes governments that could not be classified as metropolitan or nonmetropolitan.

Tj Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparison purposes.

Sources: Calculated from unpublished data from the Public Securities Association long-term municipal

bond file and from the PSA 1977 Annual Report on the Municipal Market.
Variation in the relative importance of various types of

governments is expected as the urban character of an area

changes. In urban areas, the municipal government along with

its numerous special-purpose add-ons are the primary deliverers

of public services. In rural areas, on the other hand, county

governments tend to provide most of the services and, therefore,

could be expected to issue most of the debt. Table 6 shows

that the county government's responsibility for an area's debt

increases as the area becomes less urbanized. At the same

time, the importance of city governments and special-purpose

governmental units tend to decline.

The importance of general-purpose governments in rural areas

and the higher proportion of revenue bonds issued by rural

governments point to an interesting phenomenon in the nonmetro

bond market. With the exception of school districts, the

proportion of general obligation debt issued by each type of

government in nonmetro areas is less than half that of similar

governments in metro areas. Thus, even though general-purpose

governments are more important in rural areas, they rely on

revenue bond financing to a much greater extent than do generalpurpose governments in the more urban areas.

Method of Sale Local governments use several methods to sell bonds. The

government's decision on how to sell a bond issue may be based

on prevailing market conditions, tradition, the level of

expertise of local government officials, and the character of

the bond itself. Often, however, local government officials

have no choice because legal requirements must be satisfied.

State law, for example, may require general obligation bonds

initially to be offered for sale at a public auction where the

issue is sold to the underwriter submitting the best bid.

A local government may choose to rely on the negotiated sale of

bonds through a preselected underwriting firm when it is not

required to award its bonds through a public, competitive sale.

Governments also may bypass the underwriting industry by

selling bonds directly to investors. Direct sales are easiest

when one investor, say a local bank, is willing to purchase the

entire bond issue or when the bond issue is sold to a special

fund, such as a public employee pension fund, controlled by the

issuing government.

There are advantages and disadvantages associated with each

type of marketing technique (12). Competitive sales generally

are accepted to be the cheapest and fairest means of marketing

municipal bonds. Nonetheless, a negotiated sale may be the

only practical marketing technique for complicated or small

bond issues (17). And a direct sale may be the cheapest means

23
of selling a small bond issue when investors and the issuing

government can agree on a fair interest rate.

Table 7 presents information on the importance of the various

methods of marketing municipal bonds in metro and nonmetro

areas for general obligation and revenue bonds. General

obligation bonds are generally subject to tighter regulation

by the State. The sale of general obligation bond issues over

a certain minimal amount usually is restricted to competitive

sales. However, the sale of revenue bonds is often left to the

discretion of local government officials, explaining why

73 percent of general obligation bonds were sold competitively

compared with only 20 percent of revenue bonds.

The disparity between the importance of the competitive sale of

general obligaton bonds and revenue bonds is even more striking

in the nonmetro bond market. Nonmetro governments relied on

the competitive sale of general obligation bonds slightly more

than did metro governments but used a competitive auction to

sell a much smaller percentage of their revenue bonds than did

metro governments. Most bonds issued in 1977 by nonmetro

governments were not sold competitively but were, instead, sold

through a preselected underwriter.

Negotiated sales may be more practical for many nonmetro bonds

than competitive sales. Nonmetro bond issues tend to be small

(see table 3) and either unrated or unfavorably rated (see

table 5). In addition, governments in nonmetro areas may

borrow infrequently so they may lack access to the specialized

skills needed to market a bond issue. These characteristics

make competitive offerings difficult and potentially expensive.

An additional problem that reduces the benefits of a competitive sale may be a lack of underwriter interest in many nonmetro

bonds. A competitive sale reduces the cost of issuing bonds by

increasing competition among ujiderwriters and by increasing the

pool of potential investors. The more underwriters involved in

the bidding, the greater the potential savings to the issuing

community. 13/ When only competitive sales are examined,

nonmetro governments received roughly the same number of bids

as metro governments on bond issues of similar size and credit

quality. However, underwriter competition was lower for

totally rural government bonds (fig, 3).

The importance of the private sale of bonds directly to investors

is difficult to measure with information currently available.

13/ The interest cost savings associated with additional

bidders have been estimated in several national analyses.

The study most often cited is (9^).

24
Table 7—Methods used to market long-term volume by type of debt and metropolitan status, 1977

Category

: All long-term bonds \J General obligation bonds 2_/ Revenue bonds

: Public : Negotiated : Private Public : Negotiated : Private Public : Negotiated : Private

; sale : sale : sale sale : sale : sale sale : sale : sale

Percent

Local governments "hj ! 42.7 55.5 1.8 72.9 26.8 0.3 20.3 76.8 2.9

Metropolitan 47.7 50.7 1.6 72.0 27.9 0.1 25.4 71.6 3.0

Nonmetropolitan 4/ 33.4 63.8 2.8 77.9 20.6 1.5 11.7 84.8 3.5

Urbanized 34.3 64.2 1.5 80.4 19.2 .4 12.6 85.4 2.0

Less urbanized 33.5 63.6 2.9 82.4 15.7 1.9 11.8 84.9 3.3

Rural 4/ 28.8 63.1 8.1 57.6 38.7 3.7 7.0 81.6 11.4

\J This table is based upon 4806 local government bond issues for which method of sale information is available.

The dollar volume of these bonds amounted to 99.8 percent of the volume of all local government bonds sold in 1977,

Ij Includes limited tax bonds not classified as full faith and credit obligations.

ZJ Includes governments that could not be classified as metropolitan or nonmetropolitan.

kj Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparision purposes.

Source: Calculated from unpublished data from the Public Securities Association long-term municipal bond file.

Ln
Figure 3

Average

of Bond

Number of Bids Received on Competitively Sold Bond Issues by Type

and Metropolitan Status, 1977

Local Metro Nonmetro Urban Less urban Rural

governments

Source: Calculated from unpublished data from the Public Securities Association long-term municipal bond file.

Direct sales probably are much more prevalent than table 7

indicates because these sales are less likely to be reported in

the financial press. Also, the disparity between their importance to nonmetro and metro areas is underestimated by the data

reported in table 7. Rural governments issue a higher proportion

of small, uncomplicated bond issues that can be sold directly

to investors. In addition, the debt transactions of governments

in rural areas are not watched as closely by the bond market as

are the debt transactions of frequent borrowers. As a result,

a higher proportion of the direct sales of nonmetro bonds

probably go unreported compared with the direct sales of metro

bonds. The tendency for governments in the more rural areas to

sell a larger proportion of their debt directly to investors

is, therefore, understated.

Bond Underwriters The municipal bond underwriting industry is composed almost

entirely of investment firms and commercial banks with municipal

bond departments. Only 768 nongovernment underwriters are

known to have handled the local government bonds issued during

26
1977: 399 investment firms, 366 commercial banks, and 3 life

insurance companies. Smaller sized bond issues were usually

managed by one underwriter while larger bond issues were often

managed jointly by several firms. The average local government

bond sold during 1977 was managed jointly by two underwriting

firms.

Precise information on the amount of the bonds that each was

responsible for is unavailable where more than one underwriter

purchased a bond issue. Nonetheless, the relative importance

of each underwriting group can be estimated if we assume that

each underwriter was responsible for an equal share of the bond

issue. The data reported in table 8 were obtained in this

way.

The estimated distribution of metro and nonmetro municipal

bonds underwritten by commercial banks, investment firms, and

the other participants in the underwriting industry is shown in

table 8. Investment firms managed most of the dollar volume,

over 78 percent of local government bonds in 1977. Commercial

banks handled roughly 17 percent, and insurance companies and

various governmental agencies managed the remaining 5 percent.

Commercial banks were even less important as underwriters of

nonmetro municipal bonds, largely due to the type o£ bonds

issued by nonmetro governments; commercial banks are not

allowed to underwrite most revenue bonds. 14/ While this

prohibition is not absolute, commercial banks managed less than

2 percent of the dollar volume of revenue bonds issued by local

governments during 1977. By comparison, banks underwrote

36 percent of the general obligation debt sold during the year.

Commercial banks were eligible to underwrite a smaller share of

the total debt sold by nonmetro governments because rural

governments issued proportionately more revenue bonds than

did metro governments. An examination of general obligation

bonds and revenue bonds shows little difference in the percentage

of metro and nonmetro debt underwritten by commercial banks.

Nonetheless, the percentage of general obligation debt underwritten by commercial banks drops noticeably as the level of

urbanization declines in nonmetro areas.

Investment firms underwrote nearly all revenue bonds in each

government category. Investment firms underwrote 98 percent of

14/ Commercial bank underwriting of revenue bonds was severely

restricted by the Bank Act of 1933 (the Glass-Steagall Act),

The banking industry and State and local governments have made

numerous efforts to have this prohibition removed in recent

years (8^) .

27
N5

00

Table 8—The importance of various groups in underwriting long-term volume sold by type of

debt and metropolitan status, 1977

Category

; Total long-t erm bonds \ General obligation bonds IJ Revenue bonds

\ Banks Security :

firms :

Others 2/ Banks : Security

: firms Others Banks \

Security :

firms :

Others

Percent

Local governments 2J : 16.5 78.2 5.3 36.1 54.9 9.0 1.9 95.5 2.6

Metropolitan • 18.5 76.2 5.3 36.1 54.2 9.7 2.3 96.4 1.3

Nonmetropolitan kj ; 12.6 85.4 2.0 36.2 59.2 4.6 1.0 98.2 .8

Urbanized • 14.0 85.4 .6 41.7 56.6 1.7 .9 99.0 .1

Less urbanized 11.0 85.8 3.2 33.0 59.9 7.1 1.2 97.4 1.4

Rural 4/ 13.2 83.8 3.0 29.4 64.7 5.9 1.0 98.2 .8

!_/ Includes limited tax bonds not classified as full faith and credit obligations.

2_/ Composed of life insurance companies, public agencies, and unidentified underwriters.

2J Includes governments that could not be classified as metropolitan or nonmetropolitan.

hj Excludes five Alaskan (Valdez) oil pipeline industrial development bonds for comparison purposes.

Source: Calculated from unpublished data from the Public Securities Association long-term municipal bond file.
nonmetro revenue debt during 1977. Furthermore, this share of

the market remained remarkably stable over the range of nonmetro

areas examined.

Bond Investors

Little variation appears in the types of groups underwriting

metro and nonmetro bonds. An appreciable difference in the

relative importance of underwriting groups is apparent only for

general obligation bonds issued by governments in totally

rural areas. Commercial banks tended to be less important as

underwriters of the general obligation bonds of governments in

totally rural areas either because of lack of interest, noncompetitive bids, or direct sales.

Little is known about the institutions and individuals purchasing nonmetro bonds. Estimates of the distribution of municipal

bond ownership are available for the Nation, but small area data

do not exist. Further, estimates of which investors own the

bonds of metro governments and which own the bonds of nonmetro

governments are simply unattainable because State and local

government bonds are largely outside the regulatory sphere of

such agencies as the Securities and Exchange Commission,

A national breakdown of municipal bond ownership for selected

years as reported by the Federal Reserve Board is given in

table 9. Throughout the sixties, commercial banks were the

major purchasers of State and local government bonds, purchasing

Table 9—Ownership of State and local government securities for

selected years, 1960-79

Total State and Commercial

banks

: Nonlife

Year local debt : Househclids : insurance All other

outstanding : companies

Billion dollars •Per<:ent- —

1960 68.3 24.4 43.6 11.3 20.7

1962 79.2 29.6 39.6 12.0 18.8

1965 100.3 38.8 36.3 11.3 13.6

1967 113.7 44.3 33.2 12.4 10.1

1970 144.4 49.6 31.8 11.8 6.8

1972 : 176,5 51.0 27.4 14.1 7.5

1975 223.8 46.0 30.4 14.9 8.7

1977 : 263.2 43.8 27.8 18.8 9.6

1979 : 312.7 43.4 23.8 23.9 8.9

Source: Board of Governors, Federal Reserve System, Flow of Funds Accounts,

29
over 70 percent of the net increase in municipal bonds outstanding during the decade. The relative importance of banks as

owners of municipal bonds peaked in 1971/72 when their holdings

amounted to over 51 percent of the total dollar volume of

municipal debt outstanding. The commercial banking system

remains the largest owner of municipal bonds; however, its

relative importance declined throughout the remainder of the

seventies. This decline was accompanied by a rise in the

relative importance of casualty (nonlife) insurance companies

as owners of municipal bonds.

The extent to which these major groups of investors are attracted

to rural government bonds is difficult to judge. Commercial

banks and wealthy individuals likely are the major purchasers

of the bonds of rural governments. Nonmetro debt is largely

comprised of small, unrated bond issues of governments with

which few people are familiar, so the market for nonmetro bonds

is often limited to investors familiar with the area such as

local banks and people. However, this description does not

accurately portray all nonmetro debt. Many governments in

nonmetro America have been selling large, favorably rated bond

issues comparable with the bond issues of governments located

in metro areas. Â significant port ion of the nonmetro bond

issues sold in 1977 attracted regional and national attention.

It is lucky for those governments issuing small, unrated bond

issues that the strength of rural bank support for the municipal

bond market in the seventies did not mirror the national trend.

Rural banks increased their holdings of municipal bonds relative

to other securities between 1972 and 1977, although the commercial banking system as a whole was reducing the relative

importance of municipal bonds within its securities portfolio.

The increa '* support given to municipal bonds by rural banks

and the gtv. . of these banks resulted in an increase of over

70 percent in municipal bond holdings of nonmetro banks between

1972 and 1977. By comparison, metro banks increased their

holdings of municipal bonds only 33 percent over the same

5-year period (_1^). Â significant portion of nonmetro bank

holdings likely would be comprised of the tax-exempt issues of

governments within the nonmetro areas.

The commercial banking system, particularly nonmetro banks,

probably remains the dominant group purchasing nonmetro municipal

bonds. Nonetheless, many nonmetro bonds are of sufficient size

and credit quality to attract regional and national attention.

Casualty insurance companies and other institutional and

individual investors throughout the country likely find many

nonmetro bonds to be competitive with those of larger, better

known government s.

30
POLICY IMPLICATIONS This paper has attempted to describe the nonmetro tax-exempt

bond market. Differences in the characteristics of both bond

issues and bond markets within nonmetro areas are as important

as differences between metro and nonmetro areas. Urbanized

nonmetro places often behave very much like metro places. Less

urbanized places, on the other hand, often display characteristics quite different from their more urbanized counterparts.

During the last two decades, both metro and nonmetro governments

have been quite successful in their debt financing efforts,

although fluctuations in market conditions did cause problems

periodically. From 1962 to 1977, the level of outstanding debt

per capita increased nearly 150 percent in nonmetro areas.

Totally rural governments increased their debt levels over the

same period by a percentage rate that was over twice that of

the more urbanized nonmetro governments.

This growth in the amount of debt outstanding was accompanied

by changes in the uses for which debt was issued. Reliance on

bond financing for school construction declined, particularly

during the seventies, while new uses of publicly borrowed funds

grew in importance. Borrowing to finance health facilities and

industrial development became increasingly important in nonmetro

America.

Changes in the purposes for which debt was issued help explain

another important shift in the composition of the rural bond

market: the growing importance of revenue bonds. The extensive

use of tax-exempt financing for revenue-generating facilities

increased the appeal of revenue bonds. In addition, revenue

bonds are subjected to fewer State regulations, do not count

toward State-imposed debt limits, and are often easier to issue

than general obligation bonds. These advantages have led to

a growing reliance on revenue bonds by all governments but

particularly by governments in nonmetro areas.

Other salient features of bond issues sold by nonmetro governments in 1977 included their size, maturity structure, credit

rating, and marketing method. When compared with the bond

issues of metro governments, nonmetro governments sell smaller

bond issues of comparable maturity which tend to be unrated or

carry low to medium credit ratings. In addition, nonmetro

governments, especially those serving totally rural areas, rely

on noncompetitive sales to a greater extent than do metro

governments.

The average size of nonmetro revenue bond issues was roughly

half that of metro governments while the average size of

general obligation bond issues was less than one-third that for

metro areas. The small size of these bond issues helps explain

31
why such a small percentage~57 percent—of nonmetro bond

issues have a credit rating; ratings are not needed for small,

locally oriented bond sales. The larger bond issues are rated

but, of these, a smaller percentage of nonmetro bond issues are

rated favorably than is true of metro bond issues, especially

general obligation bonds and bonds of less urbanized nonmetro

areas. This smaller percentage may reflect a view that the

economic bases or the managerial skills of the governments

serving these areas are too limited to support prime grade

bonds.

Many of the features of the rural municipal bond market have

definite cost implications. Reliance on revenue bonds and

noncompetitive bond sales tends to add to the cost of bondfinanced rural development. Low credit ratings and long

maturities can also push borrowing costs up. Rural governments

often may find issuing revenue bonds through preselected

underwriters advantageous; however, in many instances, such

choices are forced upon rural officials because of a lack of

technical expertise or underwriter indifference. To the extent

that this is true, altering these circumstances could reduce

the cost of rural development.

State and The information above suggests several State and Federal

Federal Role government actions which could improve market acceptance of

nonmetro bonds and lower the cost of bond-financed rural

development. The scope of this report has been limited to

local governments which successfully sold long-term bonds

during 1977. For this reason, the discussion will highlight

types of programs that could prove most useful to those

rural governments which have already attained some success in

marketing their bonds. Programs designed to help those governments which are effectively cut off from the tax-exempt bond

market will not be examined here. 15/

Technical Rural governments are hindered not only by the type of debt

Assistance they sell but by the infrequency of their bond sales. Small

Programs governments tend to go several years between bond sales while

15/ Throughout this section, the question of whether these

programs are cost effective from the Federal or State government

viewpoint is ignored. Based on the borrowing patterns of rural

governments, these programs probably could reduce the cost of

publicly provided services. Further research would be needed

to determine whether any particular program would be worthwhile

for an individual State.

32
large city governments regularly issue long-term debt. Therefore,

local officials in small towns cannot easily develop the

expertise needed to correctly evaluate the full range of

alternatives available when designing and selling a bond issue.

One means of acquiring this technical expertise on the marketing

process is to purchase it from the underwriting industry, often

as part of a negotiated sale. Although helpful in many cases,

a negotiated sale can add to the total cost of selling a bond

issue that, except for a lack of understanding of the marketing

process, could have been sold competitively.

Programs which help develop general managerial skills among

local officials can reduce the cost of issuing debt by reducing

reliance on negotiated sales. Current Federal efforts to

improve the managerial capacity of local officials have been

aimed primarily at grant management skills; however, they can

improve debt management skills as well. Efforts to encourage

the use of circuit riding managers who serve a number of local

jurisdictions in an area could be expanded to include bond

marketing experts who would help local officials design a bond

issue and guide it through the marketing process.

Raising managerial skills of local officials and making technical

advisors available to assist with the development of a bond

prospectus and disclosure information could also improve the

credit rating of many rural bonds. Ratings are not based

solely on the diversity of the area's economy or on the stability of the jurisdiction's revenues flows. The honesty and

competence of local officials, as perceived by the rating

analyst, also play a role in determining what the credit

quality judgment will be. The chance of receiving a favorable

rating should increase if the locality's yearly budget, capital

plans, and revenue forecasts comply with professional standards

of accuracy and completeness. These same criteria are being

demanded increasingly by underwriters and investors as well.

In the wake of New York City's budget problems, more extensive

disclosure of information and more reliable accounting procedures

have been required. 16/ If this trend continues, even the cost

of small, unrated bond issues could be affected by improving

the managerial procedures of rural officials.

16/ Partially in response to this, the Municipal Finance

Officers Association developed a set of guidelines on what

types of financial and economic base information local officials

should include in their bond prospectus; new standardized

accounting procedures have also been developed. For a discussion of the need for State oversight of local government

accounting, see (1).

33
Centralized State governments can assist small isolated local governments

Marketing by providing a number of marketing services to local officials.

Procedures North Carolina's Local Government Commission (NCLGC) is an

excellent example of the potential benefits of an expanded

State role in the local bond financing process. By providing

several bond marketing services, the NCLGC has been able to

economize on personnel, increase the demand for North Carolina's

shiall government bond issues, and reduce the public cost of

issuing bonds (4^) .

Centralized marketing can reduce the cost of issuing local

government debt by increasing the flow of information to

potential investors and underwriters, and by reducing the cost

of underwriting these bond issues. Demand for a bond issue can

be increased, thus reducing borrowing costs, by disseminating

pertinent information in a consistent, easily understood format

to all potential underwriters and investors. Furthermore,

competition among underwriters can be stimulated, leading to

further cost saving, by taking steps to reduce the cost of

submitting a bid on a bond issue.

State governments, and to a lesser extent the Federal Government,

can improve the ability of local governments to inform prospective investors in a number of ways. Collecting socioeconomic

data for general-purpose and school district governments is

already done on a regular basis. Financial data are published

ir^ several States, providing a central source of consistent

information for all local governments within the States.

Federally funded efforts to develop meaningful measures of

local government fiscal health could eventually improve the

usefulness of Statewide data services for bond marketing

purposes.

State governments could undertake the task of developing and

distributing the financial prospectus for local governments

about to sell a bond issue. Even with these marketing services,

rural governments might find underwriter competition for

their bond issues disappointingly low because of the costs

involved in submitting a bid. The geographic isolation of the

totally rural areas and the small size of their bond issues

put many rural governments at a competitive disadvantage with

governments in more urbanized areas.

Selling small bond issues at one central location convenient to

the underwriting industry, rather than selling each bond issue

at the city hall of the issuing jurisdiction, could result in

more underwriting firms bidding for small bond issues. Increased

underwriter competition generally results in lower interest

costs for bonds. The NCLGC has adopted this technique to help

small isolated borrowers in North Carolina. In addition, by

34
centralizing bond saleSj the commission is in a position to

schedule sales in such a way that small bond issues are grouped

together and sold at a time when they are not competing directly

with the sale of large bond issues. As a result^ submitting a

bid on a small bond issue is easier, less time consuming, and

less costly than would otherwise be the case.

State Supervision State government clearance of local government bond issues may

be useful for some governments and for some types of bond

issues, although local autonomy and flexibility may be reduced.

State supervision can range from sale notification requirements,

where the State has little influence over the sale, to bond

validation requirements, where the State rules on the legality

of the sale. Programs which allow local officials to request a

State clearance of a bond issue could significantly improve the

market acceptance of rural bonds without reducing local autonomy.

A local government with a pending bond sale could ideally

request a présale examination of the bond issue's design, a

ruling on the bond issue's legal validity, or a more extensive

State role in the sale and redemption of the bond issue. State

examination of the bond issue's maturity structure and bidding

rules is basically a type of technical assistance. The purpose

is to insure that the local government has a real need for debt

financing, can afford to repay the debt, and is not needlessly

making its bonds harder to sell. The potential benefits of

this type of assistance for small rural governments have

already been discussed (see p. 32).

State validation of a bond issue is concerned with the legality

of issuing the bond as a tax-exempt security. The extent of

existing State intervention varies; however, one procedure

requires a State court to rule on the local government's

authority to issue debt, on the bond issue's compliance with

State laws and debt limits, and on the tax-exempt status of the

bond (_6) . Such a ruling reduces the risk of purchasing the

bond issue because it reduces the possibility of future

questions about the bond's legality. For small governments,

having the State fully validate a bond issue could increase

demand for it for the same reason that a favorable credit

rating does: the validation reduces uncertainty.

Another option that local officials, with help from the State

government, can use to increase demand for their bonds is to

qualify the bonds. A qualified bond program allows the local

government to pledge State administered aid as additional

security on a bond. That is, at the local government's request,

the State pledges to give debt service a first claim on certain

State aid monies going to the issuing government. If the local

government defaults on its debt service obligations. State aid

35
that would have gone to the issuing government is redirected to

bond holders, although the program is not a State guarantee of

the bonds, the risk of capital loss in the event of default is

reduced, especially if the pledged aid is high compared to the

scheduled debt service. Issuing qualified bonds could reduce

the cost of borrowing by reducing investor risk on rural bonds

receiving low credit ratings because of limited tax bases.

Changing Underwriter The policy suggestions discussed thus far require Federal or

Regulations State government involvement in the marketing process, although

unlike such suggestions as the rural development bank, none of

these programs alter the operation of the municipal bond market

itself. One particular Federal action could affect rural

borrowing costs without requiring any Federal involvement in

the marketing process. Competition for rural government issues

might be heightened simply by repealing the regulation prohibiting commercial banks from underwriting revenue bonds.

Rural governments rely heavily on revenue bond financing. As a

result, a large portion of rural debt cannot be underwritten by

commercial banks. Repealing the Glass-Steagall Act would give

commercial banks the freedom to submit bids on competitively

sold revenue bonds. The added competition could lower the cost

of rural debt•

The benefits of this change in regulations are still in doubt.

The extent to which the cost of revenue bonds could be lowered

by a repeal of the bank prohibition remains a hotly debated

issue (16). Commercial banks are likely to be selective in

which types of revenue bonds to underwrite. Furthermore, faced

with competition from the commercial banking system, some

nonbank security firms may cease bidding on tax-exempt bond

offerings. Then too, many observers fear that heightened

competition for revenue bonds will come at the expense of lower

competition for general obligation bonds. The net effect of

these changes on rural government borrowing costs is yet to

be determined. However, a repeal of the bank prohibition

likely could benefit some nonmetro borrowers.

36
REFERENCES (1) Advisory Commission on Intergovernmental Relations.

"State Regulation of Local Accounting, Auditing and

Financial Reporting," Bulletin No 79-7 (1979).

(2) Bahl, Roy W. "Measuring the Creditworthiness of State

and Local Governments: Municipal Bond Ratings," Proceedings of the Sixty-Fourth Annual Conference on Taxation.

Columbus, Ohio: National Tax Association, 1971, pp.

600-22.

(3) The Bond Buyer. Municipal Finance Statistics, various

years.

(4) Boyles, Harlan E. "State Supervision of Municipal

Borrowing," Public Management, Vol. 58 (1976), 8-10.

(5) Fischer, P.P., R.W. Forbes, and J.E, Petersen. "Risk and

Return in the Choice of Revenue Bond Financing," Governmental Finance, Vol. 9 (1980), 9-13.

(6) Haley, John F, "A Study of State-Imposed Municipal Bond

Validation Requirements." Washington, D. C. Government

Finance Research Center, Municipal Finance Officers

Association, 1979.

(7) Hines, F.K., D.L. Brown and J.M. Zimmer. Social and

Economic Characteristics of the Population in Metro and

Nonmetro Counties, 1970. AER-275. U.S. Dept. Agr.,

Econ. Res. Serv., 1975.

(8) Hopewell, Michael H. and George G. Kaufman. "Commercial

Bank Bidding on Municipal Revenue Bonds: New Evidence."

Eugene, Oregon: Center for Capital Market Research,

University of Oregon, 1975.

(9) Kessel, Reuben. "A Study of the Effects of Competition

in the Tax-Exempt Bond Market," Journal of Political

Economy, Vol. 79 (1971), 706-38.

(10) Lubov, Andrea. Issuing Municipal Bonds: A Primer for

Local Officials. AIB-429. U.S. Dept. Agr., Econ. Stat.

Coop. Serv., July 1979.

(11) Mitchell, William E. "The Effectiveness of Debt Limits

on State and Local Government Borrowing," Bulletin No.

45. New York: Graduate School of Business Administration,

New York University, 1967.

(12) Moak, Lennox L. Administration of Local Government Debt.

Chicago: Municipal Finance Officers Association, 1970.

37
(13) Petersen, John, The Rating Game. New York: The Twentieth

Century Fund, 1974.

(14) . '*Small Borrowers in the Municipal Bond Market:

Does Size Matter." National Conference on Nonmetropolitan

Community Services Research. Prepared for the Committee

on Agriculture, Nutrition, and Forestry, U.S. Senate,

July 12, 1977.

(15) Sherwood, Hugh C. How Corporate and Municipal Debt is

Rated. New York: John Wiley and Sons, 1976.

(16) Silber, William L. "Municipal Revenue Bond Costs and

Bank Underwriting: A Survey of the Evidence," Monograph

1979-3. New York: Graduate School and Business Administration, New York University, 1980.

(17) Sorenson, Eric H. "Negotiated Municipal Bond Underwriting:

Implications for Efficiency." Journal of Money, Credit,

and Banking, Vol. U (1979), 366-70.

(18) Sullivan, Patrick J. "Bank Support of Municipal Bonds

Critical to RD," Rural Development Perspectives, Vol. 3.

U.S. Dept. Agr., Econ. Stat. Serv., Oct. 1980, pp. 32-35.

(19) . "Municipal Bond Ratings: Are They Worthwhile for Rural Governments?" Journal of the Northeast

Agricultural Economics Council, Vol. 11 (1982), 67-73.

(20) , J.N. Collins, and J.N. Reid. "Local Government:

Trends and Prospects," Rural Development Perspectives,

Vol. 4. U.S. Dept. Agr., Econ. Res. Serv., Sept. 1981,

pp 4-11.

(21) U.S. Congress, Congressional Budget Office, Small Issue

Industrial Revenue Bonds, April 1981.

(22) U.S. Department of Commerce, Bureau of the Census.

Governmental Finances Classification Manual, 1977.

(23) Winders, John. J. "IDB Proliferation Suggests that Only

the Tip of Iceberg Has Been Showing," The Weekly Bond

Buyer, May 5, 1980. p.l.

38
APPENDIX—GENERAL

CHARACTER OF

NONMETRO COUNTY

GROUPS

The nonmetro government categories used in this report—urbanized, less urbanized and rural—are based on a county classification scheme first developed by Mines, Brown, and Zimmer (])> A

nonmetro county is one which was not part of a Standard

Metropolitan Statistical Area (SMSA) as defined by the Bureau

of the Census in 1974. 17/ Urbanized counties include all

non-SMSA counties which had 20,000 inhabitants or more residing

in urban places in 1970. 18/ Less urbanized counties include

all non-SMSA counties which had more than 2,500 inhabitants but

less than 20,000 inhabitants residing in urban places in 1970.

Non-SMSA counties with no urban places in 1970 were classified

as rural counties.

The appendix table presents descriptive information on each of

the local government categories used in this report. Number of

counties, total population, per capita income, and aggregate

government revenues and expenditures per capita are reported

for each county category. The nonmetro areas of the country

have lower per capita incomes and smaller governmental operations

based on revenues and expenditures per capita. 19/ Of the

nonmetro areas, the less urbanized and rural areas have

lower income, revenue, and expenditure figures than their

urbanized counterparts.

The 15-year period encompassed by the local finance figures

masks the more recent trends in nonmetro government spending.

During the sixties, when the rate of population growth in metro

areas more than doubled that in nonmetro areas, expenditures

per capita increased at a faster rate in metro areas. Expenditures per capita increased at a faster rate in nonmetro

areas as the movement into metro areas slowed in the late

sixties, and as people began moving back into nonmetro areas in

increasing numbers in the seventies. Consistent with the

migration movements into rural areas, the county category

registering the highest percentage increase in expenditures per

capita during the seventies was the rural group.

17/ An SMSA is a county or group of contiguous counties which

contain at least one city of 50,000 inhabitants or more, or

twin cities with a combined population of at least 50,000. In

addition, contiguous counties are included in an SMSA if,

according to certain criteria, they are socially and economically

integrated with the central city.

18/ The urban population comprises all persons living in urbanized areas (central cities with a population of 50,000 inhabitants or more and surrounding closely settled territory) and in

places of 2,500 inhabitants or more outside urbanized areas.

19/ For a more detailed examination of recent trends in metro

and nonmetro government finances, see (20).

39
4>-

O

Appendix table 1—Local government finances by county category, 1962 and 1977

: Metro Nonmetro areas

Category Units

: areas : • : Less .

Total * Urbanized . ' Rural : : urbanized :

County total 1/ : Numbe r : 643 2,478 326 1,296 856

Population, 1960 : Thousands : 127,212 52,104 18 ,969 26,756 6,560

Population, 1977 : do. : 156,874 59,465 23 ,012 29,015 7,438

Income per capita, 1960 : Dollars : 2,046 1,349 1 ,565 1,264 1,082

Income per capita. 1977 do. : 7,510 5,747 6 ,148 5,607 5,050

General revenues per capita, 1962 : do. : 230 174 183 168 174

Taxes : do. : 132 80 87 75 80

Other local revenues : do. : 34 26 29 25 20

Intergovernment al aid : do. : 64 68 67 68 74

General revenues per capita, 1977 do. : 903 635 678 611 596

Taxes do. 394 222 245 206 213

Other local revenues do. 130 113 122 113 89

Intergovernment al aid do. 379 300 311 292 294

General expenditure.5 per capita, :

1962 do. : 246 182 194 176 181

Current spending do. : 185 149 155 145 151

Capital outlays do. : 52 29 34 27 26

Interest do. : 9 4 5 4 4

General expenditures per capita, :

1977 do. : 853 626 666 604 584

Current spending do. : 712 522 551 507 490

Capital outlays do. : 107 87 96 82 79

Interest do. : 34 17 19 15 15

1/ Represents the distribution o f county con figurations used for th e 1977 Census of Governments.

Sources: Calculated from data reported in the U.S. Bureau of the Census, 1962 and 1977 Census of

Governments and the Bureau of Economic Analysis, Personal Income data file.
ISSUING

MUNICIPAL BONDS:

A Primer for Local Officials

Issuing bonds is often the best and sometimes the only way for a community to raise enough money

to finance construction of municipal buildings, industrial parks, recreation areas, and other projects. But

the bond offering has to be done right: an overlooked legal requirement could nullify the issue; a poorly

desired issue could saddle a community with unnecessarily high interest costs for 20 to 30 years.

Local officials thinking of making a bond offering, but baffled by the bond market, can use this bulletin to help their community get the most value for its money by keeping its interest costs as low as

possible. The booklet, in a concise and nontechnical manner, explains some of the intricacies of making

a municipal bond issue. It compares the advantages and disadvantages of the chief elements of issuing

bonds and the major considerations officials face:

• The type o/Z?onJ—general obligation bonds, revenue bonds, special assessment bonds—will depend

largely on State laws and the intended use of the facility to be built.

• The maturity sirwcfwre-straight serial, serial annuity, balloon, irregular-will directly affect interest

costs, and so, how much the community will pay in the long run.

• Official ú?oeMmewís—capital improvement plan, official statement, legal opinion—must be prepared

in advance and all must include specific features.

• The bond rating can affect interest costs and the salability of the bond issue. Although most small

communities do not qualify for the highest ratings, officials can do some things to improve their

chances of getting a favorable rating.

• Underwriting cosfs-competitive vs. negotiated-will depend on the complexity and size of the

issue and will also figure into the community's total cost.

• Marketing and servicing the issue-the final steps—involve responsibilities of the community, the

underwriter, and the paying agent.

• Timing the issue through advanced planning is necessary so the community will get its money when

needed.

After describing those basic steps, the booklet refers the reader to several sources of professional

assistance. Professionals should always be consulted before undertaking a bond offering; but by reading

this booklet beforehand, local officials will be able to ask the professionals more informed questions.

Issuing Municipal Bonds: A Primer For a free copy, write to:

for Local Officials. AI B-429. EMS Publications

By Andrea Lubov. 20 pages; Rm. 0054-S, USDA

July 1979. Washington, D.G. 20250

*US GOVERNMENT PRINTING OFFICE:1983-380-932/ERS-1526
United States

Department of Agriculture

Washington, D.C.

20250

OFFICIAL BUSINESS

Penalty for Private Use, $300

POSTAGE AND FEES PAID

U. S. DEPARTMENT OF AGRICULTURE

AGR - 101

THIRD CLASS BULK RATE

Northern Great Plains Coal Mining

What are the likely effects of expanded coal mining in Montana,

Wyoming, and North Dakota on the

small towns and communities there?

Mining activity in the sparsely populated region has grown dramatically

over the last decade—from less than 20

million tons of coal in 1970, to 100

million tons in 1978, with projections

for 350 million tons per year by the

mid-1980's.

The Fort Union coal formation,

which straddles those three States contains nearly 40 percent of the Nation's

coal reserves. Its coal is highly desirable

because:

—It is low in sulfur, meaning that it

can be burned by utility companies

with less air pollution than other coal.

—It is in thick seams (some seams

up to 200 feet thick), and can be recovered by strip mining.

To try to ascertain the effects of

development on the region, the authors

of this report used computerized simulations of various levels of coal activity

tp see if the communities could afford

the increased level of government

services and upgraded infrastructure

required by new energy projects and

the larger population attracted by

those projects.

In the long run (10 years or more),

most communities in the region will be

able to pay for the services required by

the new coal-related development, provided that they can tax the new developments. Without taxing authority (for

instance, if the mine lies outside the

taxing district of a locality), they will

have problems.

Northern Great Plains Coal Mining:

Regional Impacts (by Thomas F.

Stinson, Lloyd D. Bender, and Stanley

W. Voelker; AIB-452; July 1982; 36

pages; color illustrations; $5; stock no.

001-000-04265-3).

Order from the Superintendent of Documents, U.S. Government Printing Office,

Washington, D.C. 20402. Make your

check or money order payable to Superintendent of Documents. For faster

service, call GPO's order desk at (202)

783-3238 and charge your purchase to

your VISA, MasterCard, or GPO Deposit

account. Bulk discounts also available.